Category Valuations

The 0.1% Risk Premium: Why the S&P 500 Hits Stall Speed at 6,000 The 0.1% Risk Premium: Why the S&P 500 Hits Stall Speed at 6,000

The 0.1% Risk Premium: Why the S&P 500 Hits Stall Speed at 6,000

Another week comes to close - as we draw near the end of the second quarter. For the past two weeks or so - investors are reluctant to push prices much higher. From mine, the index is not only expensive - trading near a forward price-to-earnings (PE) ratio of 22x - the downside risks don't handily offset the (possible) upside reward. For eg, it would not surprise me to see the S&P 500 trade up to a zone of 6,200 (adding another 5% or so). However, equally I see a possibility for a 10% to 20% move lower given the risks to earnings growth, inflation (from tariffs), employment and geopolitical tensions.

The 1,100 Point Gap: Why 22x Earnings Defies the Gravity of 0.2% GDP Contraction The 1,100 Point Gap: Why 22x Earnings Defies the Gravity of 0.2% GDP Contraction

The 1,100 Point Gap: Why 22x Earnings Defies the Gravity of 0.2% GDP Contraction

If we needed confirmation that economic growth is slowing - today we got it. The US economy shrank at the start of the year, restrained by weaker consumer spending and an even bigger impact from trade. Gross domestic product (GDP) decreased at a 0.2% annualized pace in the first quarter. And there were also warning signs from the labor market...

The Cost of Capital Reality Check: Why Rising Bond Yields Dictate the Next Market Cycle The Cost of Capital Reality Check: Why Rising Bond Yields Dictate the Next Market Cycle

The Cost of Capital Reality Check: Why Rising Bond Yields Dictate the Next Market Cycle

Can the stock market significantly advance with bond yields going higher? That's what investors are trying to gauge. As governments around the world look increase their (already high) levels of borrowing and spending -- it's plausible bond yields are set to rise further. And it's not hard to explain why... demand is falling as supply increases. But at what point does the stock market say enough?

The Bond Vigilante Vote: Why 5% Yields and a $4 Trillion Deficit Could Break the S&P 500 The Bond Vigilante Vote: Why 5% Yields and a $4 Trillion Deficit Could Break the S&P 500

The Bond Vigilante Vote: Why 5% Yields and a Trillion Deficit Could Break the S&P 500

Markets paused to take a breath this week following a six-week ~22% surge. The S&P 500 surrendered a routine ~2.80% - after touching a 12-week high of 5,968. With the market trading at 22x fwd earnings (a premium in any environment) - investors are arguably more mindful of (a) ongoing tariff risks- with new threats from Trump on Europe and Apple; and (b) the thread of rising bond yields - and any potentially widening of the deficit.

S&P 500 Earnings Trap: Why Market Optimism Faces a Macro Reality Check S&P 500 Earnings Trap: Why Market Optimism Faces a Macro Reality Check

S&P 500 Earnings Trap: Why Market Optimism Faces a Macro Reality Check

Factset reported S&P 500 companies are "highly uncertain" for the balance of this year. This is well above the 10-year average of 179; and more than double the previous quarter. And it makes sense... it's impossible to know what impact tariffs could have over the coming two to three quarters (or more). But what's almost certain - any impact won't be positive. We can say with certainty that tariffs (even if only 10%) are an economic burden - where I estimate the cost to both companies and consumers to be more than $300B. So who will pick up the tab?

Math Trap: Why S&P 500 Valuations Lack a Critical Margin of Safety Math Trap: Why S&P 500 Valuations Lack a Critical Margin of Safety

Math Trap: Why S&P 500 Valuations Lack a Critical Margin of Safety

The S&P continues its impressive six week rally - up over 22% from its early April low of 4,835. At 5,916 - this represents a forward price to earnings (PE) ratio of ~22x - with earnings per share (EPS) expected to be ~ $270 this year. If we take the inverse of 22x - that gives us the market's earnings yield; i.e., 4.56%. The question whether 4.56% represents a good risk/reward? There's an easy way to answer that... let's explore.

The V-Shaped Recovery: Assessing the Fundamental Foundation The V-Shaped Recovery: Assessing the Fundamental Foundation

The V-Shaped Recovery: Assessing the Fundamental Foundation

Markets staged a 'rip your face off' rally on the back of Trump's 90-day pause on 145% tariffs with China. Over the past three months - the rally ranks among the best we've seen in three decades. The question is can it continue; and what needs to happen? My primary concern - it's not supported by any major change in monetary policy...

Earnings Divergence: Decoding S&P 500 Valuations and the Mag 7’s Growth Deceleration Earnings Divergence: Decoding S&P 500 Valuations and the Mag 7’s Growth Deceleration

Earnings Divergence: Decoding S&P 500 Valuations and the Mag 7’s Growth Deceleration

We're about half way through Q1 2025 earnings. So far they're showing double-digit YoY growth. However what companies are struggling with is guidance. They have very limited visibility through the "tariff windshield". And whilst stocks are reacting well to past earnings and optimism Trump will back down on his draconian tariffs - it's difficult to gauge both how much damage has been done? For now, markets remain optimistic however I would treat this rally with caution.

The Big Tech Guidance Gap: Navigating AI CapEx & The Psychology of Valuations The Big Tech Guidance Gap: Navigating AI CapEx & The Psychology of Valuations

The Big Tech Guidance Gap: Navigating AI CapEx & The Psychology of Valuations

When Charlie Munger was asked the secret to his success - he answered “I’m rational.” Rational is not paying "33x forward earnings" for a company like Apple or Microsoft - despite their quality. Rational is also not selling the S&P 500 when it plunges to trade at just 16x forward earnings - because you are worried about a possible recession. Rational is adding exposure to high quality assets when they are at or below their long-term mean. And the more below the mean they trade - the stronger your (long-term) conviction should be.

The Quality Filter: Why a 15% Net Margin and 10-Year ROIC are the Only Antidotes to a Sideways Market The Quality Filter: Why a 15% Net Margin and 10-Year ROIC are the Only Antidotes to a Sideways Market

The Quality Filter: Why a 15% Net Margin and 10-Year ROIC are the Only Antidotes to a Sideways Market

It's my thesis market returns over the next few years are unlikely to match what we've seen over the past decade. However, I'm also of the view that will create great opportunities for savvy patient investors who think long-term. This missive defines what is meant by "quality" investments - and the attributes investors should focus on. And if we are see a more challenging climate the next few years - it's higher quality assets which will shine.